Building trades put financial clout to work
The building trades unions in Northeast Ohio are using their financial muscle to build the region and keep their members working.
The pension and health and welfare funds supported by many of the 31 unions or district councils in the Cleveland Building & Construction Trades Council (CBCTC) are investing in or lending millions of dollars to many of the most significant real estate developments in the region.
For example, the Employee Real Estate Construction Trust Funds, or ERECT Funds, put $13 million into the $116 million, 20-story One University Circle residential complex that towers over University Circle. It also provided a $9.6 million subordinated bridge loan for the conversion of the former East Ohio Gas Building into 223 luxury apartments, The Residences at 1717 East Ninth Street.
More recently, the AFL-CIO Housing Investment Trust (HIT) agreed to direct the proceeds of a $43 million bond issue created by the federal Government National Mortgage Association as a first mortgage on the $56.9 million Church & State mixed-use project in Ohio City.
"We are not your grandfather's building trades unions," said David Wondolowski, executive secretary of the CBCTC. "We have a robust capital strategies program that is very enticing for developers today."
Contributed Rendering from original article: A rendering of the $56.9 million Church & State project, at 2850 Detroit Ave., proposed by a development group led by Hemingway Development.
Wondolowski said that developers are now coming to the unions early in the development process because of the variety of financing options their investment funds offer.
"We can do anything," he said. "We can do senior debt, subordinated debt, mezzanine loans, we can do equity, we can do construction loans, bridge loans — a whole variety of investment."
The investors in the ERECT and HIT funds are the pension and health and welfare funds of the unions, said Tad Imbrie CEO of PenTrust Real Estate Advisory Services Inc., a Pittsburgh real estate advisory firm that oversees the ERECT Funds.
Like any pension fund, the building trades union funds take in contributions from employers and employees and make long-term investments to insure benefits when workers retire. Investing in or lending on real estate is a long-term investment similar to the stocks and bonds in their investment portfolios.
Imbrie said a number of Northeast Ohio union funds invest in the ERECT portfolio, and he's eager that the ERECT Funds continue to invest in the region.
"We pool their money and provide loans and equity financing," said Imbrie, ticking off Cleveland unions such as Laborers Local 310 and Local 38 of the International Brotherhood of Electrical Workers whose pension and welfare funds invest in the ERECT Funds. "Our goal is to get a good rate of return (for the union funds) and to create jobs."
Wondolowski and Imbrie were both clear that prudent investments were the primary lending criteria. But keeping building trades workers earning paychecks was important, too, though Wondolowski said a commitment to 100% union labor can't always be a requirement since project subcontractors sometimes were not unionized.
An ERECT Funds PowerPoint presentation describing its recent investments shows four Northeast Ohio projects costing a total of $220.3 million. The ERECT Funds committed $34.1 million toward the total financing packages, and those investments produced $77.5 million in labor, largely union, payroll.
Dan Pedrotty, director of capital strategies for the National Association of Building Trades Unions (NABTU), said the HIT fund and another similar fund, the AFL-CIO Building Investment Trust, make similar loans or investments.
"Job number one for (the pension funds) is getting good returns to pay benefits," said Pedrotty, who telecommutes from Lakewood for the Washington, D.C.-based NABTU. "But if we can also create jobs in the process for our members, that's money coming back into the funds through contributions and work hours. So it's a win-win."
The HIT Fund has invested $42 million in three Warehouse District residential renovations in recent years, in the Bridgeview, Crittenden Courts and Marshall buildings.
Stephen Strnisha, CEO of the Cleveland International Fund, a private equity fund, said he has watched the ERECT Funds in particular take a strong interest in investing in the region.
"I know they've been pretty consistent in their involvement (in Northeast Ohio)," he said. "Those kinds of funds are very helpful in putting capital stacks together."
A capital stack is the collection of financial instruments that total up to the cost of a real estate development. It's called a stack because it prioritizes the level of security each loan, equity investment or tax credit has in the project. The largest, secured loan is typically at the top of the stack, but projects can't go forward until the bottom, smallest loan or investment completes the stack.
Strnisha, who is credited with putting together the 30-plus pieces in the capital stack for the Flats East Bank project, said one reason the union fund investments are important here is because the number of pieces in a financial stack for a project in Cleveland is greater than in a stronger real estate market.
The union funds have been involved in construction lending for years but have recently stepped up their activity as traditional bank-secured loans have gotten harder to come by.
Graham Veysey, one of the partners in the Church & State project, was invited by Wondolowski and Pedrotty, whom he knew from the year they shared as Presidential Leadership Scholars program sponsored by presidents Bill Clinton and George W. Bush, to a roundtable last summer designed to promote the HIT Fund to developers.
"That's where the conversation started," Veysey said. "To have a project where we could use 100% union labor and they also share in the upside is great."
The HIT Fund investment was the largest piece in the Church & State stack.
Original article: https://www.crainscleveland.com/article/20180413/news/158196/building-trades-put-financial-clout-work